Western Standard - Finance Minister Freeland's Capital Gains Tax： A Move for Intergenerational Fairness？

00:00:00.000 Good evening, Western Standard viewers, and welcome to the first edition of Hannaford.

00:00:21.940 In the weeks to come, we'll be talking to prominent Canadians who make news, do things,

00:00:28.700 and think great thoughts. And we want to start this week with a man who is probably Canada's

00:00:35.600 most distinguished economist, that would be Jack Mintz. Certainly when I was at the PMO,

00:00:41.440 I always used to think, isn't it great that Dr. Mintz always gets his phone calls returned.

00:00:47.120 Then later I found out that actually it was our office that was calling him. So it gives you

00:00:53.260 some measure of the authority and the scholarship that lies behind the Mintz name. Many of you have

00:00:58.460 seen his work in print since. He's been quite prolific. Jack, it's great to have you here.

00:01:04.000 It's my pleasure, and I'm very happy to join your inaugural podcast.

00:01:08.720 Thank you, Jack, and thank you for doing that. Look, maybe I could ask just by way of a starter,

00:01:15.260 does the present government ever ask you what you think?

00:01:18.660 Well, it depends which part of the government. I do hear from some of the departments with regard to

00:01:26.240 some issues they may want to get some background on from me. So I do have that kind of communication,

00:01:34.280 but I don't really hear from the PMO. I think I've been kind of dismissed.

00:01:40.160 So, you know, the finance minister does not have you on speed dial?

00:01:45.660 No, for sure not.

00:01:47.420 I think it's all of our loss that that is the case. Jack, I'd like to talk to you about two things today.

00:01:53.460 One we talked about earlier is the critical tax theory, which sounds wild. But before we go there,

00:02:00.840 maybe we could just talk about what has happened with the capital gains tax.

00:02:04.880 It strikes me that an awful lot of people find the idea of a capital gains tax something that they

00:02:11.900 either don't think they need to think about or maybe it's somebody else's problem. But recently,

00:02:18.260 the finance minister, Chrystia Freeland, raised it significantly. What has she done?

00:02:24.660 What is she trying to achieve? And is it going to work?

00:02:28.560 Well, I think, first of all, she wanted more revenue to balance, well,

00:02:33.000 at least try to keep her deficit from not getting higher than $40 billion that was promised

00:02:38.360 this past year as one of the objectives. And of course, that included delaying expenditures, but it

00:02:44.280 also included bringing in this new capital gains tax increase. And in fact, people were warned about

00:02:52.440 it in the April budget that it would come in on June 25th, which it has. And of course,

00:02:58.920 that would give people time to sell assets between the date of the budget and when the date of

00:03:04.840 implementation, which of course would give more revenue to the government in the current year,

00:03:10.200 all very helpful for the deficit, for sure. So I think that was a primary objective. But in terms of

00:03:19.560 tax policy terms, I think the idea is one that actually I think is important to consider,

00:03:30.520 because we have to remember at one time in Canada, we didn't have a capital gains tax. This was before

00:03:35.720 1972. It was brought in in 1972 in a major tax reform at that time. And the reason we brought in capital

00:03:45.000 gains taxation was that people would try to pay out income in the form of dividends and other,

00:03:53.320 sorry, pay people out in the form of capital gains, rather than other forms of income like dividends,

00:04:00.760 in order to avoid taxes on dividends, employment income, etc. And so to provide more balance in the

00:04:07.640 system, the capital gains tax came in. But in recognition that actually capital gains is already

00:04:15.080 taxed once at the corporate level. In other words, when companies reinvest their after tax profits,

00:04:21.640 that causes the value of the firm to go up. And of course, if the corporate tax rate is higher,

00:04:27.480 the less that capital gain is going to be for investors. So that was the logic for bringing in

00:04:33.720 a capital gains tax rate that was lower than the ordinary tax rate, and in fact, roughly parallel

00:04:41.560 with the dividend tax rate at that time. Now, Jack, we're talking a lot about companies reinvesting,

00:04:48.920 corporations paying taxes. But I have a feeling that ordinary Canadians are going to feel this too,

00:04:57.160 even though the finance minister says that it's only a very small and rarefied group at the top of the

00:05:04.760 income charts that will. You, I believe, have done some calculations on how many people will be affected

00:05:14.360 by the capital gains tax, and the kind of things that are likely to be subject to capital gains, small

00:05:21.560 businesses, family cottages, those sorts of things. Can you just expand on what it means for ordinary

00:05:31.080 people who may get a once in a lifetime capital gain? But how many are there? Well, I think, first of all,

00:05:41.320 the minister was very wrong in the way that the data was reported, where she said only 1.4% of taxpayers

00:05:48.680 would be affected. This is kind of gives an idea that the people who get over $250,000 in capital gains

00:05:58.280 because the new rate applies to only capital gains in excess of $250,000. And it was the impression was

00:06:08.760 given that these people tend to get capital gains like that every year. And so it's the same small

00:06:15.000 number of people that are going to be affected. That was totally wrong. Because on a lifetime basis,

00:06:22.920 there are many people that get more than $250,000 of capital gains in a year, but they may only do it

00:06:29.800 once or twice in their lifetime. A good example of that, of course, is, you know, someone who buys a

00:06:35.480 cottage in 1980. And let's say the cost of that cottage was $100,000. And then they sell it for

00:06:43.080 40, 45 years later for, let's say $500,000. So there's a capital gain of $400,000. But some of

00:06:51.000 that is just simply due to inflation. And it's not, and, and often this kind of money is what people use

00:06:57.800 for their retirement, as well, just like all the money that's put into a pension fund or an RSP.

00:07:04.680 There's a huge amount of money that pays out an annual pension every year. So it's, it's when you

00:07:12.760 actually look at the data, and I did this, there were, there's a lot of people who without the $250,000

00:07:21.000 in capital gains, and this was just in the recent data, if they didn't get over $250,000 in capital gains,

00:07:30.360 their actual income tax taxable income, half the population was below $100,000. So a lot of middle 0.95

00:07:37.400 class people were affected. In fact, 10% of the population would have only only had $18,000 in taxable

00:07:44.360 income. And that might be surprising, but I'm not surprised because there could be people who died

00:07:49.240 leaving in the state that subject to the capital gains tax at that point. And they don't have a

00:07:54.840 lot of income at that point. And it also could be farmers, for example, they tend not to have a lot

00:08:00.040 of money every year, not a lot of cash. But the one thing they do have is land. And of course, when they

00:08:06.440 die, or if they sell their land, and that's the time when they get a lot of money through, you know,

00:08:12.600 by selling their, their property, which is, of course, part of their retirement income,

00:08:18.280 when they do retire. So there's a lot of middle class people that are going to be affected.

00:08:23.480 So I found, I was given some data that Statistics Canada has put together. And what it's shown is that

00:08:32.680 in 2011, for example, there were about 44,000 people that had capital gains more than $250,000.

00:08:42.600 However, out of that 44,000, two thirds only claimed capital gains of that amount in that year.

00:08:54.360 In the next 10 years, they didn't claim it at all. So two thirds of that 44,000 people

00:09:00.760 only claimed capital gains more than $250,000 in just one year, and had less than that in other years.

00:09:09.080 So we didn't have any, you know, didn't have capital gains that would go over the $250,000 mark.

00:09:16.120 And so that's, that's, I did a calculation, sort of taking into account the whole population,

00:09:23.000 to find how much on a lifetime basis, people actually do pay capital, this capital gains tax

00:09:28.600 rate that will now be over $250,000. And I calculated, and this is a rough estimate,

00:09:36.280 I admit, because I didn't have all the data that I would have liked, but I estimated about 1.25 million

00:09:42.680 people are affected by the gains tax increase for this year, not just 44,000 people.

00:09:52.040 So to put this in very human terms, I mean, you mentioned the cottages, you mentioned the transfer

00:09:57.800 of land. I mean, these are things that people do, and there's nothing wrong with that. But it does sound

00:10:02.760 like we're already talking about people who are wealthier than the average. Let's take the case

00:10:07.560 of a person who starts a small business manufacturing something in an industrial

00:10:16.680 estate in southeast Calgary, starts it in 1980 with a loan from his dad, works hard at it for 45 years,

00:10:25.960 wants to sell out so that he can retire in some comfort, and that business that he built that was

00:10:31.640 worth nothing when he started is now worth $1,000,000. He is going to be giving what,

00:10:38.840 two thirds of that to the government? Is that really how this is going to work?

00:10:43.240 No, it's not two thirds. So the way the capital gains tax increase or tax operates

00:10:51.560 under the pre-June 25th rules is that when a person sells their property, they calculate the

00:10:57.480 difference between the sale price and the original cost of buying that property. That's the capital

00:11:04.520 gain. Then in the previous or under the current previous June 25th situation, one half of that

00:11:13.000 gain is included as taxable income and then subject to the tax rate. And let's say if you were at the top

00:11:19.480 Alberta rate, for example, 48%, then the capital gains tax rate is 24% on, on the, on the total capital

00:11:28.760 gain. So, so in case of a, let's say a person that has a million dollar capital gain from selling a

00:11:35.800 small business, he would pay about $240,000 in capital gains taxes under the old system. Under the

00:11:43.560 new system, uh, because the first, uh, the first $250,000 of the capital gain is still taxed at, uh, only

00:11:52.840 one half is included in income and taxed at the 24% rate. However, uh, the next $750,000 is going to be

00:12:01.720 taxed at the capital gain, uh, at an occlusion rate of, uh, two, two thirds instead of one half. So, uh,

00:12:10.280 two thirds of $750,000 is $500,000 and, uh, the, and the tax rate, uh, is, uh, 48, uh, 48%, uh, on that.

00:12:23.720 So that means a person will end up paying, uh, very close to $250,000 in capital gains, uh, on the 750,000

00:12:33.400 and he, and he will pay on the $250,000, he will pay, uh, uh, $125,000. So when you add the two up, uh,

00:12:43.560 you can see it's a, it's a very significant increase in the amount of tax to be paid, uh, because of that

00:12:49.080 extra tax, it's going to be on in, on capital gains more than $250,000. And so that's case of, uh, of that

00:12:56.440 small business owner, for example. So they, okay. Now I believe that the finance minister makes the case

00:13:02.760 for this on the basis of intergenerational fairness. Is there any fairness in this that you can see,

00:13:09.720 Jack? I mean, is there a, is there a positive side to this? Cause it sounds outrageous.

00:13:14.920 Well, you know, it's kind of, well, first of all, there, there, uh, there was a huge mistake again

00:13:19.000 made in the, by the minister and the budget in the way they discussed the issue. They were, they were

00:13:23.800 comparing capital gains tax rate. Uh, let's say that someone pays, um, uh, on capital gains, uh,

00:13:32.680 uh, from, from, let's say their bit, you know, from, uh, selling their business assets or, or, or,

00:13:39.240 or whatever property. Um, and they were comparing that tax rate to let's say the tax rate on employment

00:13:45.960 income. So, uh, let's say in Alberta, the, uh, tax rate on employment income, 40%, just to, uh, give an

00:13:53.880 example. And the capital gains tax rate might be under the old system would be 20%. And they would

00:14:00.280 say, Ooh, that's very unfair. However, what was not mentioned is that capital gains were already,

00:14:07.320 uh, taxed under the corporate income tax. And, and in fact, uh, there's a very close relationship

00:14:13.800 between the dividend tax rate and the dividend tax credit and the capital gains inclusion rate,

00:14:19.880 where those, those are provided in the system as a offset for the corporate tax that's already been

00:14:26.200 paid on the profits before, uh, before they're distributed or, or reinvested. And so the capital,

00:14:34.600 uh, so, uh, really the capital gains tax, the capital gains tax tax rate really is not just the

00:14:43.640 personal rate, but you have to add in also the corporate tax, uh, that was paid, uh, in addition

00:14:49.560 to that. And that could actually bring it up to 40%. So there was no, no particular, uh, unfairness

00:14:57.000 in that sense. Um, now, uh, there, there isn't, uh, now there is another aspect to this and that is

00:15:05.000 capital gains taxes are paid on, on, on the actual nominal income without any adjustment for inflation.

00:15:12.200 If we made an adjustment for inflation, the actual gain is much smaller because people, uh, have lost

00:15:18.840 value of their, their money because of inflation, the purchasing power of their money has fallen

00:15:24.600 because inflation over the years. So the actual capital gains tax rate, uh, on what you might call

00:15:31.560 real capital gains after you adjust for inflation is going to be significantly higher, uh, than the

00:15:37.640 number that's often given, uh, in comparison, um, uh, the, you know, the way the number is normally

00:15:44.440 reported like 25%, the real rate could be like 50% or 60%, uh, depending on how much of the game has

00:15:52.520 been reduced by inflation. So that is also not, uh, included in the way of thinking about how much tax

00:16:00.200 is actually paid on capital gains. Jack, I found it absolutely astonishing that a government with all

00:16:05.800 the resources and advice at its, uh, disposal could make a mistake of that magnitude. Um,

00:16:11.480 I could add just one more, one more, uh, with regard to intergenerational equity, it's, it's interesting

00:16:20.280 that no one has actually really, uh, put this in, in these terms. Um, but under the, uh, under, you know,

00:16:28.840 when people pass away or, you know, as they get close to the end of their life, they gift their

00:16:34.040 money, either as donations or they give it to their children. And so there is intergenerational equity

00:16:41.080 in the sense that people do pass on their wealth, uh, to the next generation, uh, but they, or, or to

00:16:47.640 the people that they want to donate to. And that's what you might think of as individuals making that

00:16:53.480 decision for themselves who they want to support. Uh, and, and of course there's a lot of people

00:16:59.160 that do donate their property, not just give it to their children. When the government taxes the

00:17:04.680 property as in the capital gains tax for intergenerational equity, what they are doing is making

00:17:12.440 the decision for the people about who should benefit from those taxes. Uh, and of course, uh,

00:17:18.600 I think it's one thing that Canadians would support if the money was going into something like

00:17:23.160 healthcare, but as we know with this government, uh, at the federal level, there's been a huge

00:17:28.600 expansion in the public service. There's been huge amounts of money given out to contracts. Some of it

00:17:35.480 looking, looks like it was corrupt in the way that it was done. Um, and, and there's been a lot of, uh,

00:17:42.120 grants paid out. Perhaps the people were, we're not sure we really would have wanted to give those grants to.

00:17:47.960 And so are, is there really generational equity that's being, being enhanced, uh, when you have

00:17:53.880 a government that's using the money in ways that are, that has nothing to do with intergenerational

00:17:59.160 equity, but instead for politicking in terms of, uh, getting more support from their base.

00:18:04.760 I can feel another column coming on Jack. Um, Jack, you mentioned inflation. They say it's 2.7%,

00:18:11.880 but it doesn't feel like 2.7%. Why is that? Well, inflation, uh, you know, when we talk about

00:18:20.440 inflation, we, we often talk about the current rate, which is, uh, 2.7%, which is how much consumer

00:18:27.880 prices have gone up over the past year. Uh, let's say, you know, if we're talking about June, uh, 2024,

00:18:36.040 then we look at the rate from July of 20, uh, 23 consumer prices from the end up until, uh,

00:18:43.000 the end of June. And, and that would give us a year over year, uh, inflation rate, like 2.7%.

00:18:50.440 Uh, but people, uh, aren't looking at inflate, uh, inflation rates. Uh, the bank of Canada does,

00:18:57.320 in fact, they should do because they want to see how the trend in inflation is changing,

00:19:02.600 because that's a guide to their industry policy. But for individuals, what they care about is the

00:19:08.360 price level. In other words, the cumulative change in prices over time. And of course, since, uh,

00:19:16.760 beginning of, uh, 21, uh, you know, after the pandemic, uh, prices have climbed up quite a bit.

00:19:25.160 Uh, you know, food prices have gone up, uh, over 20%, uh, shelter prices over 20%,

00:19:31.240 gasoline prices, 60%, uh, et cetera. And it would be one thing if people's incomes kept up with

00:19:38.440 inflation. Uh, but that's not what happened, uh, for several years now inflation is a little bit

00:19:45.480 below the wage increases, but that's only been in the past year. So when people look at their

00:19:50.440 position today and they think about what it was like, let's say at the, uh, you know, before the

00:19:56.280 pandemic, they feel their money is being stretched. They don't have as much money to spend because

00:20:02.120 prices have gone up so much more, uh, than their incomes, uh, that they, that they are unhappy as a

00:20:08.920 result. And so it's a past, the cumulative change that matters to people, uh, not the actual inflation

00:20:15.960 rate when it comes to their budget. Jack, if a man was, or a woman was earning a hundred thousand

00:20:23.000 dollars a year in the year 2021, what would they need to be earning today to have the equivalent

00:20:31.880 purchasing power that they had three years ago? I've calculated that and I'm not sure if I

00:20:37.640 remember it correctly, but, uh, it is something, uh, in the 15% range or 20%. Really? Well, that's

00:20:44.760 terrible. Okay. Jack is one of the thing that's buzzing around at the moment that is a critical

00:20:50.440 tax theory. We've heard of critical race theory where I guess the idea is that the system is rigged so

00:20:56.760 that certain groups can do well and other ones don't, and that's not fair. Now, what is critical

00:21:02.920 tax theory? I, I see the Canadian tax council is looking for learned papers on it. What would you tell

00:21:08.120 them? Well, actually, it's a, it's a good question. In fact, uh, in one week I had two requests, uh, uh,

00:21:15.560 to, uh, with regard to papers or, you know, uh, one was from the cane tax foundation, which is excellent

00:21:22.040 place. And they, their Canadian tax journal runs policy forms and they wanted to do a policy form

00:21:28.440 on critical tax theory. Uh, but I also got a message from, uh, tax notes, which is a major us, uh, publication

00:21:37.800 for, um, practitioners and many people get around the world. In fact, I get tax notes international,

00:21:43.960 which is, uh, one of their three publications and, uh, and it goes through like 50,000 people

00:21:51.640 in terms of tax practitioners. Uh, and they were also asking for papers on critical tax theory.

00:21:59.400 So I thought, uh, Jean, I, I don't know a lot about this. So I decided to read a whole bunch of papers

00:22:06.200 of critical tax theory. And what critical tax theory basically says is that, you know, we, we look at the

00:22:13.080 way, uh, we tax people according to differences in income. Uh, but income is not the only thing that

00:22:19.560 matters in terms of looking at differences in people. Uh, uh, you know, there's other factors

00:22:26.440 that are important. Uh, and I think that's fair enough. I think most people would agree with that

00:22:32.200 statement. Um, but then they would make the jump and this is where I find it very difficult to jump.

00:22:39.160 Uh, but then they say, well, they differ according to race, sexual orientation, uh, uh, gender, um, you

00:22:48.920 know, uh, et cetera. Uh, and, and they talk about, uh, the need for social justice. Um, when I say there's a

00:22:56.680 jump, you know, it, it, it sort of already goes into a certain direction, which is, has been very common

00:23:02.920 in critical race theory, looking at certain people that are identified as being disadvantaged. Uh,

00:23:09.320 although there's a lot of other people who are disadvantaged that may not fall on those categories,

00:23:13.320 but that's that's point. Uh, but that's what they do. And so then they start looking at, uh,

00:23:19.720 different policies in terms of whether it's, uh, you know, it's disadvantageous to, to, to certain races

00:23:29.080 or, or gender, et cetera. And, and, and we should be fixed dated on that and make changes, uh, in terms

00:23:35.800 of tax policy for that purpose. Um, so just to take an extreme case, which I haven't seen anyone really

00:23:42.120 argue with, but, uh, if I was going to ask a question with my students, if you're applying critical

00:23:47.480 tax theory, uh, should we have a, a different income tax schedule, uh, for let's say, uh, blacks, 0.58

00:23:56.280 versus Asians and whites, uh, where maybe the blacks would get a higher exemption levels, more, 0.78

00:24:02.360 lower marginal tax rates, uh, according to brackets, uh, compared to let's say whites and Asians who do 0.69

00:24:08.120 better. Uh, is this an implication of critical tax theory? Now you said that this was an extreme

00:24:14.520 example and that nobody has actually floated that yet. Do you see that coming? And can you give us

00:24:22.360 an example of something that has been proposed? Well, there has been, some of it is actually,

00:24:29.080 kind of logical in the sense that, uh, I, I wouldn't even need critical tax theory. I just need

00:24:35.320 good old tax principles to make an evaluation. So some of the discussion, especially in the United States

00:24:41.560 has been, uh, let's say higher property tax payments, uh, made in certain neighborhoods like

00:24:48.280 black neighborhoods, uh, and the kind of services they gather a lot less, uh, than, you know, what

00:24:54.440 they're, you know, what they're relatively paying in terms of property taxes. Uh, and that certainly is

00:25:00.200 an unfairness. In fact, it was Portuguese living in that neighborhood. I would say it's unfair to the 1.00

00:25:06.120 Portuguese too. Uh, and in fact, basic tax policy would say if you have proper benefit taxation,

00:25:13.240 then you would want some alignment between municipal services and property taxes. Uh, and so I think,

00:25:20.600 that is just to me, uh, very sensible tax policy without getting into critical tax theory. Uh, and it

00:25:27.240 would apply to anybody that wouldn't just apply to certain designated groups. Uh, but then again,

00:25:33.240 I've seen some proposals saying, for example, um, you know, low, uh, court reductions in corporate tax

00:25:39.960 rates are, are, are, are unfair to, to blacks and to, uh, let's say, uh, disabled people or, or whatever.

00:25:50.440 And, uh, uh, and that I think assumes, uh, something about who pays the corporate tax, which is a

00:25:58.040 fundamental area of disagreement by economists, uh, many will say that actually a lot of the corporate

00:26:03.720 tax has shifted back onto labor, uh, not onto capital owners, uh, especially in an open economy,

00:26:11.640 where, uh, capital will flee to other countries if you try to tax it. And so therefore, uh, you know,

00:26:18.600 who ends up getting hurt by the corporate tax, uh, are, are the people that work because they end up

00:26:24.120 getting lower wages or getting fired, uh, from their jobs. So, so if that's, if that, if, if one

00:26:31.240 believes that story and there's some significant evidence that that story applies to many countries,

00:26:37.480 at least to a certain extent, then, uh, then that would suggest that it would be very bad for, uh,

00:26:43.880 let's say certain races or disadvantaged people if you raise corporate taxes, but the critical tax

00:26:50.360 people seem to assume that corporate taxes are, uh, you know, paid by the powerful, by the rich,

00:26:58.200 and therefore, uh, should be raised. And to me, that's a wrong conclusion, uh, especially given

00:27:03.480 the data that we know today. Well, last question then, Jack, is the government of Canada, the present

00:27:11.480 administration looking at introducing separate tax rates according to ethnic or group identity?

00:27:24.680 I don't think so. I hope not. Uh, I would be appalled if they did, uh, because I think that would

00:27:31.160 go against, I think, a sense of fairness, uh, amongst a lot of people. Uh, and again, I think it's because,

00:27:36.920 you know, income is, I think, a very good measure of how well someone is doing, and so they can

00:27:43.080 understand why rich people need more tax than poor people, but, uh, but I don't think, I think they

00:27:50.200 would have a lot of difficulty to say that certain groups in society should pay less tax than other

00:27:55.640 groups. Um, I don't know. I hope that they would, Jack. And I hope that you will be there in a position

00:28:01.800 to give your advice if that ever should come up. Right. Jack, this has been a pleasure. Thank you

00:28:09.000 so much for joining us. And for the Western Standard, I'm Nigel Hannibal.

00:28:31.800 Thank you so much for joining us.

Western Standard - July 03, 2024

Finance Minister Freeland's Capital Gains Tax： A Move for Intergenerational Fairness？

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